Do we still need a Commerce Commission?

If the Government is serious about disciplining its spending and stopping growth in bureaucracy, as Treasury recommends, the on-going relevance of the Commerce Commission must become a matter for immediate debate.

Many producers are currently in greater need of protection than consumers, who are benefiting from reduced demand and over-capacity. Meanwhile, governments everywhere are intervening to tilt the playing field to the advantage of at-risk firms. Our own Government paid scant regard to either competition law principles or market-distorting effects when it introduced guarantee arrangements for the banking and financial services sector. Elsewhere, the merger or full nationalisation of banks has proceeded without recourse to the regulator. Governments are raising new barriers to trade, to protect their own farmers and workers. “Buy local” is fast replacing “Buy green” as the consumers’ mantra, often with official encouragement.

The implications of these interventions cannot be ignored. The overall trend is that nations which once promoted competition law and open markets to boost productivity and innovation are now focusing instead on immediate measures to alleviate the global crisis. If the Commission Chair is aware of the drastically changed environment, there is no reference in her foreword to the Commission’s latest Annual Report 2007/08. Instead, she took the opportunity to extol President Herbert Hoover, as “a proponent of competition”. Hoover apparently had said that “competition is not only the basis of protection to the consumer, but is the incentive to progress”.

That choice of champion is unfortunate as the global economy slips inexorably from recession to depression. Hoover was widely criticised for his failure to deal with the last great global crisis and, after being soundly defeated in 1932, became a critic of his successor’s New Deal solution, railing against the “statism” it would lead to.

Equally unfortunate is the Chair’s rationale of the Commission’s role, namely:

By promoting competition and regulating where competition does not naturally exist, the Commission delivers benefits for consumers and businesses. Consumers reap the rewards of competitive prices, better quality and greater choice, and businesses thrive when given the opportunity to compete on a level playing field.

The promise that competition will be good for all now seems anachronistic.

It is too easy to forget that competition law is in fact a recent arrival in this country. And, it was introduced here for a specific purpose. That purpose was not to “bust” industry-wide combinations (or “trusts”) of the kind that had prompted the US Sherman Act. Nor was it to promote the sectoral interests of small business and consumers, as led to the Australian Trade Practices Act.

Rather, our Commerce Act was introduced as part of a local economic experiment by the reformist Labour government of the mid-1980s. As the outline to the 1985 Bill released by the then Department of Trade and Industry explained:

The [Commerce] Bill must be reviewed in the context of other government policies and actions to remove the regulation of the economy which no longer has any economic benefit. If any policy to free up the economy is to be effective, legislation to counter private regulation of the market place is necessary. That “freeing up” referred to the removal of the restrictive controls that previous governments had imposed on the New Zealand economy. Memories of Hoover’s depression – which lasted longer in New Zealand than elsewhere – meant that the need to protect producers, promote employment and provide housing took political primacy for a long time in this country. Ultimately, successive global crises led to the imposition of controls over prices, wages, interest rates, currency and credit that were unsustainable. Statism had failed; and deregulation – supported by enforced competition – was to provide an antidote. From the start, the competition cure had its shortcomings. Some sectors – especially those previously dominated by direct state involvement, such as telecommunications, energy transmission and ports – showed that change of ownership did not ensure change from previous practices. So, as competition was perceived to fail in particular sectors, regulation was introduced piecemeal. Resort was also had to regulation when the Commission declined to allow for the advent of a national dairy champion.

In the process, competition law – and the Commission – has lost much of its original purpose. The notion that the legislation would be largely self-enforcing has been replaced by need for an annual government grant of almost $40 million. That sum may soon increase. In its Briefing to the Incoming Minister of Commerce, the Ministry of Economic Development (MED) reveals that it has been undertaking a “detailed baseline review” of the Commission with PricewaterhouseCoopers. All details of that review have been withheld apart from its conclusion that “the Commission is significantly under-resourced”. MED also refers to the Commission potentially gaining broadcasting regulatory responsibilities. Doubtless that, too, would involve more public cost.

Of greater concern than its increasing cost, is the overly interventionist approach that the Commission is now adopting to private enterprise. The fundamental premise of competition law is that firms should make their own competitive choices unconstrained by either the state or collusion. The Commission is intended to serve as the market’s referee, not its coach. But the Commission has taken an increasingly distributive stance.

First, in exercising its regulatory functions it has come to value a dollar saved by a consumer at more than a dollar profit allowed by a producer. In so doing, it promotes mere rivalry rather than competition, by forcing successful firms to create headroom for their less efficient rivals. This is most evident when the source of complaint which prompts the Commission’s intervention is a rival itself.

Second, as the Commission’s latest Annual Report proclaims, the Commission now focuses its enforcement litigation on “maximising compensation to consumers and penalties achieved”. That is, the Commission now gives its cartel investigation a high priority because, the Chair claims, their behaviour “robs companies and consumers of the benefits of competition”. In relation to one such cartel investigation she said:

Many New Zealand businesses and every consumer will have been directly affected by the increased… costs over many years.

Even recognising that regulators start with “a supersized helping of moral authority”, such hyperbole is unacceptable. Most of the Commission’s cartel investigations to date have been in areas of peripheral relevance to our economy. Enforcement in this area has become an opportunistic revenue-gathering exercise. Skeptics would say that the Commission’s focus on cartels has more to do with its inability to secure victories in misuse of power cases – that is, in relation to those concentrated sectors that are core to the economy – than any actual danger from cartels. Third, the Commission seems to view all commercial decisions it disagrees with as indicative of market failure or misuse of market power, deserving of either litigation or regulation. This, despite frequent indications from the courts that all firms, even those with market power, are permitted to act in what they judge to be their commercial best interests. Far from accepting that its own analysis may be flawed, the Commission has called repeatedly for legislative change to deliver victories in the place of its past defeats.

Indeed, MED’s Briefing refers to the Commission’s two recent section 36 losses and indicates that not only is MED carrying out a review of the “effectiveness” of section 36, but the Commission itself is undertaking a parallel review of the prohibition! No doubt both these “reviews” will result in a demand for more legislative tinkering and increased penalties, in due course.

MED’s Briefing also refers obliquely to the fact that the term of the present Chair of the Commission is due to expire next month, and that both the Deputy Chair and Telecommunications Commissioner are on leave of absence. MED simply tells the Minister that it will “report separately on membership and appointment issues”. But, surely function should take precedence over appointment? And certainly, prospective change in function must affect appointment.

The unfortunate truth may simply be that competition law is a luxury that some governments can no longer afford. Markets themselves are failing unless there is significant state intervention. Our regulator is no longer the impartial and occasional arbiter that the Commerce Act once presumed the Commission would be. So, isn’t it time for drastic change?

In the current climate of mistrust of markets and regulatory failure, the strong temptation will be simply to provide the Commission with more powers and more funding. The MED Briefing reveals its author’s predilection for criminalisation of cartels as well as support for more profligate spending. This seems in stark contrast to Treasury’s call to reduce wasteful expenditure and improve the quality of existing regulation.

More sensibly, Treasury expressly proposes introducing one or two in-depth reviews of regulatory regimes per year. The Commerce Commission and the Commerce Act establishing it should go to the top of that list. But, for the meantime, MED has advised its Minister against making a bid for the 2009 legislation programme as “systems are generally working well”.

Our urgent need for a comprehensive economic growth strategy runs counter to that kind of complacency. Innovation, enterprise and investment are all currently constrained by a competition regime that may have run its course and a Commission that has confused its purpose. There should be a fundamental review – and not one carried out by MED and the Commission itself.

A possible outcome of that review could be:

Retain the Commerce Act but disband the Commission – most elements of the Act are self-policing and competitors already take a strong role in preventing misuses of market power;

Transfer responsibility for investigating price fixing and Fair Trading Act breaches to the Crown solicitors – the Commission briefs them to do the work anyway, and really that’s the essence of the “consumer protection” role; and

Transfer the policy responsibility from MED to Treasury, or to some other agency whose activities and philosophy are more closely aligned with an economic growth strategy.

The agency should be charged with monitoring and making recommendations to government in relation to industry-specific outcomes that would have the goal of increased productivity and efficiency, rather than increased competition. More generally, it could look at the continued relevance of a competition law regime for a country that is small, remote, open and still highly dependent on primary sector producers who face heightening barriers elsewhere.

The agency’s guiding principles could be:

Productivity should not be allowed to be constrained by inefficiency;

New Zealand’s size, remoteness and dependency on primary exports are factors that cannot be ignored;

Efficiency and growth will require innovation, enterprise and investment (especially in infrastructure and to provide connectivity with global markets);

Regulation should be imposed only where market outcomes are demonstrably inefficient;

Regulation should be targeted to addressing the source of those inefficiencies; and

Regulation should be proportionate to the problem and impose the least costs necessary to remedy the issue.

This article was first published in The National Business Review. Grant David is a partner at Chapman Tripp. The views expressed here might or might not be shared by clients of the firm or others within it.